Deferring Taxes

January 19, 2016

A common piece of financial advice that’s floating around in print magazines and online journals is that a person should spend taxable money first, leaving IRAs and other tax-deferred accounts to grow tax free until they withdraw the funds many years later. “Never tap your pre-tax accounts before age 59 ½.” “Don’t touch the funds in your Roth IRA until you’ve exhausted all of your other accounts.”

What often passes for “common wisdom” in financial media is usually long on “common” and short on “wisdom.” The truth is that for many retired people (or those nearing retirement), that kind of advice is simply wrong and could be costly from a tax perspective.

How can deferring taxes until later be a bad thing? For starters, we can look at our progressive tax system. As our income increases, rates scale upward. By using the lower income tax brackets more effectively today, we can help to keep our taxes lower later on. In other words, if you went against “common wisdom” and started taking at least some money out of your tax-deferred IRA in the first year of retirement and beyond, you could dramatically reduce your tax expenses over the long haul.

This is true because when you reduce the amount of money that’s in your IRA instead of letting it grow unfettered for the first eight to ten years of retirement, you reduce the amount of money that you’ll eventually be required to take out at age 70 ½. For people with large IRA balances, they may, by law, wind up having to withdraw much more money than they need to live on—money that is taxed at ordinary income rates and could force a person to pay more tax on other income sources (like Social Security).

It all comes down to tax management. You might want to pay a little more in taxes now in order to save yourself from a much bigger tax bill later on. The advisors at Lucia Capital Group can help you decide what strategy is right for you after a quick review of your financial situation. Call them today at 800-644-1150.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal.

No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at, or call (800) 772-1213 to speak with an SSA representative.

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